The Kyrgyz Republic Opportunities and challenges to agricultural growth FAO INVESTMENT CENTRE COUNTRY HIGHLIGHTS

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1 The Kyrgyz Republic Opportunities and challenges to agricultural growth FAO INVESTMENT CENTRE COUNTRY HIGHLIGHTS

2 FAO INVESTMENT CENTRE

3 The Kyrgyz Republic Opportunities and challenges to agricultural growth Johan Swinnen Professor of Agricultural Economics Kristine Van Herck Research Assistant Astrid Sneyers Research Assistant LICOS Centre for Institutions and Economic Performance, Catholic University of Leuven COUNTRY HIGHLIGHTS prepared under the FAO/EBRD cooperation and presented at the Kyrgyz Agricultural Investment Forum, Bishkek, September 2011 European Bank for Reconstruction and Development

4 The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations (FAO) concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The mention of specific companies or products of manufacturers, whether or not these have been patented, does not imply that these have been endorsed or recommended by FAO in preference to others of a similar nature that are not mentioned. The views expressed in this information product are those of the author(s) and do not necessarily reflect the views of FAO. All rights reserved. Reproduction and dissemination of material in this information product for educational or other non-commercial purposes are authorized without any prior written permission from the copyright holders provided the source is fully acknowledged. Reproduction of material in this information product for resale or other commercial purposes is prohibited without written permission of the copyright holders. Applications for such permission should be addressed to: Director Investment Centre Division FAO Viale delle Terme di Caracalla, Rome, Italy or by to: Investment-Centre@fao.org FAO 2011 On the cover, Dreamstime

5 The Kyrgyz Republic - Opportunities and challenges to agricultural growth TABLE OF CONTENTS Acronyms 6 Acknowledgements 7 Executive summary 8 1 Context 19 2 Comparative analysis 21 3 Challenges and opportunities 49 4 Conclusions and recommendations 69 5

6 ACRONYMS AISP ALP CEEC CIS EBRD FAO FDI FMD FSU GAO GDP IFI IMF IRP KAMIS KGS LARC MSFF OECD OIP-1 OIP-2 RADS R&D TFP USAID USD VAT WTO WUAs Agricultural Investment and Services Project Agricultural Labor Productivity Central and Eastern European Countries Commonwealth of Independent States European Bank for Reconstruction and Development Food and Agriculture Organization Foreign Direct Investment Foot-and-Mouth Disease Former Soviet Union Gross Agricultural Output Gross Domestic Product International Financial Institution International Monetary Fund Irrigation Rehabilitation Project Kyrgyz Republic Agricultural Market Information System Kyrgyzstani som Legal Assistance to Rural Citizens Micro and Small Enterprise Finance Facility Organization for Economic Co-operation and Development First On-Farm Irrigation Project Second On-Farm Irrigation Project Rural Advisory and Development Services Research and Development Total Factor Productivity United States Agency for International Development United States Dollars Value Added Tax World Trade Organization Water Users Associations 6

7 The Kyrgyz Republic - Opportunities and challenges to agricultural growth ACKNOWLEDGEMENTS This report was financed by the Special Shareholders Fund of the European Bank for Reconstruction and Development (EBRD) and the Food and Agricultural Organization of the United Nations (FAO), under the cooperation between the two institutions. It provides a background analysis of the Kyrgyz agricultural sector. Its main findings were presented at the Kyrgyz Agriculture Investment Forum (KAIF), held in Bishkek on 28 and 29 September The objective of the Forum, a first of its kind, was to promote investments in agriculture and rural development in Kyrgyzstan. The Forum brought together over 130 participants from both the public and private sectors who discussed modalities to increase investment in the country s agriculture sector. The main authors of this report are Johan Swinnen, Professor of Development Economics; Kristine Van Herck and Astrid Sneyers, Research Assistants all from the Catholic University of Leuven (Katholieke Universiteit Leuven), Belgium. Azamat Akeneev, Agricultural Economist, Business Development and Investment Council, Bishkek, also contributed to the report. The authors would like to convey their sincere thanks to the following people for their constructive guidance: Talay Asylbekov, Banker, EBRD; Eugenia Serova, Senior Advisor to the Director; Emmanuel Hidier, Senior Economist; Michael Marx, Senior Rural Finance Officer; David Lugg, Senior Agronomist; and Kunduz Masylkanova, Economist all from FAO s Investment Centre Division. Sarina Abdysheva, Investment Officer, Sub- Regional Office for Central Asia, FAO, and Dinara Rakhmanova, Assistant Representative for the Kyrgyz Republic, FAO, provided useful comments. The authors are also grateful for the suggestions made by the participants of the Forum, during which an earlier version of the report was presented and discussed. The opinions expressed in this report are the sole responsibility of its main authors Johan Swinnen, Kristine Van Heck and Astrid Sneyers. 7

8 EXECUTIVE SUMMARY Agriculture is one of Kyrgyzstan s most important economic sectors, contributing to approximately 22% of the gross domestic product and employing about 35% of the country s workforce. After the break-up of the Soviet Union in 1991, the Kyrgyz Republic implemented a number of rapid market oriented reforms and was the first CIS country to join the WTO, under remarkably low protection levels. Successful land-reform policies converted the agricultural sector into an engine for growth during the late 1990s, leading to robust economic expansion. However, despite this promising start, growth in agriculture, as well as in overall economy, stagnated in more recent years. A large share of the population still depends on farming for social security reasons rather than as a business activity. Overall, productivity is low and farmers are not integrated in modern supply chains. The objective of this paper is to provide an overview of the agricultural and agribusiness sector in the country in a comparative framework, to identify policy bottlenecks, define priority areas for public investment and interventions of IFIs, donors, and development agencies (including the EBRD) and provide policy recommendations to improve the attractiveness of the agricultural sector for investors. It was prepared as a background paper for the Banks contribution to the Kyrgyz Agriculture Investment Forum organized by the Kyrgyz government on 28 and 29 September 2011 in Bishkek. Output and productivity Agriculture remains a very important economic sector in the Kyrgyz Republic. Although the share of the agricultural sector in total GDP and employment has decreased over the past decade, agriculture still represents a high share in total GDP (22%) and employment (35%). In fact, the Kyrgyz Republic has the highest share of the agricultural sector in total GDP in the region. The food processing industry represents 7.5% of GDP. Most of the agricultural production is concentrated in small individual farms. Since 1991, there has been a dramatic individualization of land tenure and farm production as a consequence of the process of land and farm reform. In 2007, the individual sector produced 97% of the agricultural output and its 8

9 The Kyrgyz Republic - Opportunities and challenges to agricultural growth share in arable land use was 73% (compared to respectively 44% and 3% in 1991). There were 106 state farms, 1,448 collective farms, 313,061 peasant farms and 726, 632 household farms. Gross agricultural output strongly recovered after the initial decline in the first years of transition. In the first years of transition gross agricultural output strongly decreased in Kyrgyzstan, as it has been the case in all CIS countries. In the country, agricultural output started to increase again in 1995 and, by the beginning of the 2000s, agricultural output exceeded the pre-reform level. By 2009, agricultural output was 18% above its pre reform level. Productivity increased strongly in the late 1990s, but productivity growth has slowed in the 2000s. Rapidly after transition, agricultural yields in Kyrgyzstan strongly increased. Driven by the strong increase in land and animal productivity, Total Factor Productivity (TFP), the most comprehensive productivity measure, started to increase already in the first years after transition. Compared to its neighbors, the Kyrgyz Republic managed to do much better as a consequence of the fact that it was among the first countries in the region to start the land reform process, which rapidly led to privatization and individualization of the agricultural sector. Kyrgyz agriculture benefited from shifting from corporate farms to family farms as it is characterized by a relative labor-intensive production structure. The increase in agricultural yields was the main driver behind the increase in TFP in the period From 2000 onwards, agricultural yields stagnated (and even slightly declined), which resulted in a stagnation of TFP from 2000 to Since 2005, agricultural employment has started to decline, which was the main driver behind an increase in agricultural labor productivity and a consequent (small) increase in TFP. Economic growth was strong in the early 2000s, but recently several crises reduced growth in agriculture and in the entire economy. In the period, GDP increased strongly, while unemployment and poverty decreased. However, crisis periods and political instability interrupted this. In 2005, the first crisis hit the region when the president and its government were overthrown during the Tulip Revolution. This resulted in political instability, which had a negative impact on the growth in the overall economy including in the agricultural sector. In 2008, crisis periods hit the region again when the effects of increasing food prices and 9

10 the world-wide financial crisis became clear. The economic crisis constrained economic growth in Kyrgyzstan because of reduced inflow of remittances from the large population of Kyrgyz workers who migrated to the resource-rich neighboring countries to work. In 2010, a third shock hit the country when anti-government political demonstrations eventually led to the overthrow of the government. In the south, the political and social tensions translated in inter-ethnic clashes. These conflicts largely affected all economic activities, including in the agricultural sector. Constraints for growth An increase in economic growth is central to enhance agricultural productivity. Tackling the political unrest and ethnic violence (as in April-June 2010) is important as they are a constraint for economic growth and have reversed part of the growth which had taken place in the mid-2000s. A stable political and economic environment is also necessary to attract foreign capital in the agricultural and food processing sector. The level of human capital in the agricultural sector is low. Although there is a favorable age structure in the agricultural sector, the level of human capital in the agricultural sector is low and many of those employed in agriculture do not have adequate skills. In general, Kyrgyz farmers are young, especially compared to the age structure in Western Europe and in Central and Eastern Europe. Barely 5% of the farmers are older than 60 years and approximately 40% of the population is younger than 30 years. However, despite the favorable age structure, the level of education in the agricultural sector is lower than in other sectors. While in 2009, only 5% of the agricultural workforce had a higher education level than secondary education, almost 30% of the workforce active in other sectors had a higher education level. In addition, there is a mismatch between education and employment: only 7% of those employed in agriculture have a degree in agriculture, while 45% have a degree in fields completely unrelated to agriculture, such as education (33%) or medicine (12%). This may be due to a lack of alternative employment and the absence of the appropriate social assistance programs. Therefore, young unemployed households are not likely to leave the agricultural sector and stop their subsistence farming activities. 10

11 The Kyrgyz Republic - Opportunities and challenges to agricultural growth A key constraint for growth in rural areas is poor rural infrastructure. Transport infrastructure. The Kyrgyz Republic is a mountainous country and, in combination with the poor state of the road and railway infrastructure, transport from the producer to the consumer is usually relative expensive and time-consuming. As a result, the country s logistical performances rank among the poorest in the world. The poor railway infrastructure in Kyrgyzstan and its neighboring countries is also an important challenge for international transport as it hampers trade expansion. In addition, trade expansion is hampered by administrative barriers and issues related to customs and border crossing which translate into large informal payments. Storage infrastructure. Storage capacity is inadequate in the country, which has an important negative effect of the quantity and the quality of Kyrgyz agricultural produce. It is estimated that approximately 15% of the produce is spoiled before it reaches the market to due to inadequate storage. The need for better equipped storage facilities is confirmed by recent anecdotal evidence from Kyrgyz entrepreneurs who indicate that they are in general reluctant to store their products in existing facilities because of frequent electricity outages and outdated infrastructure. Recently, different projects financed by the World Bank (such as, for example, the Agribusiness and Market Project ) are investing in the rehabilitation of storage facilities. Irrigation infrastructure. In general, the country is well-endowed with water resources for irrigation: the glaciers allow irrigating agricultural land without any significant energy cost. However, since the collapse of the Soviet Union, water management institutions have weakened and infrastructure maintenance has in many places come to a standstill. Recently, there have been substantial investments in the irrigation sector financed by the World Bank, the Asian Development Bank, USAID and the government. However, despite these substantial efforts, it is estimated that still respectively 56% and 79% of the existing off-farm and on-farm irrigation and drainage systems need rehabilitation. Overall the poor maintenance of irrigation infrastructure has led to environmental problems such as land salinization and waterlogging, which have a negative impact on agricultural productivity. 11

12 Difficulties faced by farm support services for small and medium-sized farms. There have been efforts to adapt farm support services to the needs of small and medium-sized farms, but overall participation rate is relatively low and financial self-sufficiency of the extension provision is questionable. The Kyrgyz Republic has rapidly processed the reform process after transition. As a result of the process of privatization and individualization, the farm structure shifted from a sector dominated by large scale cooperative farms to a sector dominated by a million small or medium-sized producers. However, in general, this shift has been only partially accompanied by reform or upgrading of farm support services and infrastructure for new farm structures, which have fundamentally different needs. The existing extension services in the country are largely donor financed. Extension services (including to small household and peasant farmers) are provided through the Rural Advisory and Development Services (RADS), which received technical assistance and financial support under the Agricultural Support Services Project and later under the Agricultural Investments and Services Project, both financed by the World Bank. According to the impact assessment of the Agricultural Support Services Project, the results are mixed. There has been a substantial increase in the number of farmers participating in the extension services, but overall only a small percentage of the Kyrgyz farm population received extension services in Moreover, in 2007, when donor financing declined, there was also a large drop in the extension services provided, which raises questions on the self-sufficiency of the system. Important to note is the prominent role that mass-media (radio, newspapers and television) play in providing extension services. Low investment in the agricultural sector constrains growth for all stakeholders in the supply chain. There has been a substantial increase in the amount of credit (by banks and microfinance organizations) directed to the agricultural sector. While in 2004, commercial banks only provided KGS 113 million to agricultural enterprises, this increased in 2010 to KGS 3,350 million. Similar figures hold for credit provided by nonfinancial institutions (micro-finance): it increased from KGS 348 million in 2004 to KGS 5,000 million in However, the amount of credit provided remains low compared to its share in GDP or employment. The most common type of credit in the agricultural sector is credit provided by non-financial institutions (61% of all credit directed to the agricultural sector). 12

13 The Kyrgyz Republic - Opportunities and challenges to agricultural growth Working capital credit provision takes place through the microfinance institutions, supplier credit or interlinked contracting. Processing companies face substantial credit constraints themselves which limit their ability to overcome farmers credit constraints and engage in interlinked contracts. Although there are some examples of successful contracting, there are frequent contract breaches by both parties. Credit for large investments, such as farm machinery, is usually provided by financial institutions. The availability of long-term lending is limited, which is reflected in high interest rate spreads. The low level of access to credit for investments leads to a lack of farm machinery, although this is also partly due to the farm structure of the country (with lots of smallholders). Only few farmers are integrated in modern supply chains. In general, Kyrgyz farmers are not integrated in modern supply chains and the majority of the food products are distributed through open markets or bazaars (usually unprocessed). The instable macro-economic and political climate, the poor judicial system and the lack of FDI are constraints for the integration in modern supply chains. Some may also point to the farm structure (dominance of small farmers) as the main constraint for the development of modern supply chains since modern retailers may prefer to contract exclusively with larger farmers. However, in case that small farmers dominate the sector and represent the majority of the potential supply base, processing companies and retailers exactly need to integrate these small farmers in the supply chain in order to have sufficient supplies. FDI in the Kyrgyz economy is low compared to the other CIS countries. Overall, FDI in the Kyrgyz economy is low compared to the other CIS countries. Also, in the agri-food industry, foreign investments are limited. Since 2007, there has been a substantial increase in the inflow of foreign capital in the agri-food industry. However, in 2011, the inflow of foreign capital started to decreased as a result of social tensions and political instability in the country. In the past, FDI has played an important role in the development of modern supply chains in other countries in the region. While the conditions to start up a new business are relatively favorable in Kyrgyzstan, companies face important constraints when actually engaging in business activities, especially with respect to paying taxes, trading across borders and enforcing contracts. Other constraints for foreign investors are the volatility of the political 13

14 system, uncertainty on the economic environment and the lack of physical infrastructure. There are serious concerns for food safety and quality. Poor animal health and the lack of an effective veterinary service are the most important factors limiting the development of the livestock sector. Poor animal health not only negatively affects animal productivity, but also poses serious public health risks and limits the country s export potential. In addition, the lack of internationally recognized testing facilities is an important constraint for the country s export potential as it prevents Kyrgyz farmers and food processors to establish direct business relationships with potential foreign partners at the end of the supply chain. There are also serious concerns with respect to food quality. Poor quality of raw material (agricultural products) poses problems for further processing, limiting the export potential and integration in modern supply chains. In order to improve food safety and quality, the World Bank implemented the Agricultural Investment and Services Project which is especially targeted to improving the situation in the livestock sector. It aims to promote the use of vaccines, improve the coverage and quality of the existing advisory services and strengthen the services provided by private veterinarians. Policy recommendations An agricultural development strategy in Kyrgyzstan can only be successful if it is a part of a broader development and (rural) social policy strategy. First, a key element to enhance agricultural productivity is an increase in economic growth. Growth of the non-agricultural economy will pull surplus labor out of the agricultural sector, an evolution which is necessary to increase agricultural productivity and consequently increase agricultural incomes. Political instability, anti-government protests and ethnic violence (as in April-June 2010) are constraints for economic growth and have reversed a part of the growth which had taken place in the mid-2000s. Overall the authorities have acted rapidly to address the consequences of the June events: social spending was stepped up, emergence aid to the affected households was provided and essential infrastructures, such as energy connections, were rehabilitated. Nonetheless, it is clear that social tensions persist and governance security arrangements continue to be inadequate. A 14

15 The Kyrgyz Republic - Opportunities and challenges to agricultural growth comprehensive program of reconciliation needs to be pursued with a focus on market recovery in the south (e.g. repair of destructed infrastructure), peace and tolerance building (e.g. respecting human rights for all ethnic groups), youth inclusion and building confidence in security and justice (e.g. by tackling corruption). Second, it is crucial to invest in rural education and agricultural extension services (including those targeting small household and peasant farms). Investment in (rural) education and extension services would contribute to several objectives, consistent with the overall objective of rural development, such as improvement of the productivity of existing enterprises, the development of new enterprises, and a shift of underemployed farm labor to other activities, thereby increasing labor productivity of the remaining farms. In order to increase the coverage of the extenstion services, policy makers could further explore the role the mass media can play in the existing advisory and extension services. Third, a successful agricultural development strategy also needs to be integrated with a regional development strategy. Crucial elements are improved infrastructure and a good investment climate. Investments in rural infrastructure such as irrigation, electricity supply and road infrastructure are needed as they will help smaller farmers to integrate in modern supply chains by lowering their transport costs (e.g. by better road infrastructure) or improving the quality of their produce (e.g. constant electricity supply allows better cooling conditions). In addition, improvements in the road infrastructure will improve access to urban areas and thereby attract more off-farm employment. Investments are crucial for improving the competitiveness of the agricultural sector and the entire foodchain, but may have important spillover effects in terms of quality upgrading and guaranteeing food safety. The existing investment climate is performing relatively well in terms of setting-up a new business, but is performing much worse in terms of the ease of doing business (e.g. taxation irregularities, substantial administrative barriers when crossing borders, corruption and problems with contract enforcement). In combination with economic and political instability, these are major constraints for foreign and domestic investments. Further, stimulating cooperation between small farmers can help them to overcome some of the constraints they are currently facing. For example, access to machinery can be improved by making use of machinery pools. Finally, although there have been recently some efforts to improve the situation, improvements of both public and private veterinary 15

16 services are needed since poor animal health negatively affects agricultural productivity and even threatens public health (e.g. persistence of dangerous animal diseases such as brucellosis). Priority interventions for EBRD The Bank has already invested in the country s agribusiness sector, but would like to explore further investment opportunities in this important sector of Kyrgyzstan s economy. It is important to emphasize that, in the light of these recommendations, the creation of a stable political and economic environment will be an absolute necessity as it will be crucial to provide confidence to private investors to enhance sustainable long-term investments. However, there are still some specific areas in which the EBRD can play an important role in stimulating the growth and performance of the Kyrgyz agri-food system. With respect to this, we can distinguish between areas for policy dialogue with the government and directions for EBRD projects. Areas for policy dialogue with the government. A key area of attention for the EBRD is the development of the private sector. Building a sustainable private sector which can contribute to growth remains a challenge. While it is relatively easy to start up a business in the country, there are still important constraints afterwards, when actually doing business, such as taxation irregularities, contract enforcement, but also uncertainty created by political instability. Improving the business environment is crucial to stimulate investment. Through policy dialogue with the authorities as well as civil society, the EBRD can assist in creating an attractive investment climate, which is necessary to provide confidence to private investors and enhance sustainable, long-term investments. Creating macroeconomic and political stability, improving the court systems, improving corporate governance of enterprises, improving tendering and licensing procedures, tackling corruption, enforcing existing regulations and increasing the availability of financing to private businesses are key elements in the development of the country s private sector. Kyrgyzstan s logistical performance ranks among the poorest in the world, which hampers agricultural productivity and the development of modern supply chains. Improvements in Kyrgyz road, rail and electricity infrastructure are crucial. Improving rural infrastructure can make an important contribution to regional development. By improving access to urban areas, off-farm employment and foreign 16

17 The Kyrgyz Republic - Opportunities and challenges to agricultural growth investment are attracted. Better incomes and new jobs can help to reduce poverty considerably, especially in structurally weak regions. Directions for EBRD projects. Improving access to finance at all levels of the agri-food supply systems is important. The EBRD has a large and very successful expertise in working with international investors and local companies. This makes the EBRD very well positioned to help the country in this area. One area is the introduction of innovative/alternative financing schemes, such as alternative collateral schemes. Providing funding for technical assistance and training for banks offering leasing is another way to meet the growing demand for credit. Further, providing assistance to processing companies, retailers and traders to develop innovative contract mechanisms will improve farmers access to capital, inputs and information. An important constraint for future investments by the EBRD in the Kyrgyz agribusiness industry (loans and equity) is the identification of suitable partners. An commonly used strategy of the EBRD in other countries of the region is to finance investments by foreign companies or joint-ventures between a local and a foreign partner. However, there is only limited interest of foreign companies in the Kyrgyz economy because of the instable political and macroeconomic climate (see also Areas for policy dialogue with the government ). Moreover, an assessment to identify suitable local partners for the EBRD by FAO in nine subsectors (beer, oilseeds, cotton, tomato paste, milk and cheese, leather, meat processing, animal feed and sugar) has shown that most of the existing local processing companies are too small, which makes it difficult to justify stand-alone transactions. In addition, the management staff often lacks the appropriate knowledge and know-how required to engage in an EBRD project such that the assistance of a foreign company is strongly recommended. Currently, in Kyrgyzstan, the EBRD has an equity share in a dairy processing company and has provided a loan to a food retailer. The agricultural sector has a major gap in appropriate technical and management skills, which constrains the implementation of improved quality and productivity practices. Offering assistance in the establishment of private-public partnerships for the development of well-targeted R&D, extension services and agricultural training will improve the technical and management skills of those active in the agricultural sector. 17

18 The Kyrgyz Republic - Opportunities and challenges to agricultural growth Chapter 1 Context Agriculture is one of Kyrgyzstan s most important economic sectors, contributing to approximately 22% of the gross domestic product and employing 35% of the country s workforce. After the break-up of the Soviet Union in 1991, the Kyrgyz Republic implemented a number of rapid market oriented reforms and was the first CIS country to join the WTO, under remarkably low protection levels. Successful land-reform policies converted the agricultural sector into an engine for growth during the late 1990s, leading to robust economic expansion. However, despite this promising start, growth in agriculture, as well as in the overall economy stagnated and a large share of the population still depends on farming as a social security net rather than as a business activity. Overall, productivity is low and farmers are not integrated in modern supply chains. An important driver behind the shortfalls in the macro-economic trends and agricultural development has been political instability. Since the Tulip revolution in 2005, the country was thrown in a state of political turmoil which in 2010 resulted in large scale protests. In addition, in 2010, there were also violent clashes between two ethnic groups (Kyrgyz and Uzbeks), which led to the death of 300 persons, the internal displacement of 400,000 persons (at the peak of the crisis) and tense relations between Kyrgyzstan and Uzbekistan. This illustrates that one of the most important factors for the development of the agricultural sector as well as the overall economy is political stability. Furthermore, investment in the agri-food industry can be a driver behind growth in the agricultural sector, which can be an engine for growth in the overall economy. The European Bank for Reconstruction and Development (EBRD) has already invested in the country s agribusiness sector, but would like to explore further investment opportunities in this important sector of Kyrgyzstan s economy. The objective of this background paper is to provide an overview of the agricultural and agribusiness sector in the Kyrgyz Republic in a comparative framework; define priority areas for public investment and interventions of IFIs, donors, and development agencies (including EBRD); define policy bottlenecks and provide policy recommendations to improve the attractiveness of the agricultural sector for investors. 19

19 20 This policy note was prepared as a background paper for the Bank s contribution to the Kyrgyz Agriculture Investment Forum ( the Forum ) organized by the Kyrgyz Government on 28 and 29 September 2011 in Bishkek. The objective of the Forum was to promote investments in agriculture and rural development. It brought together participants from both the public and private sectors, in particular potential investors, who discussed modalities to increase investments in Kyrgyzstan s agriculture sector from a policy point of view, as well as concrete investment proposals.

20 The Kyrgyz Republic - Opportunities and challenges to agricultural growth Chapter 2 Comparative analysis In order to interpret the agricultural and rural developments in Kyrgyzstan, it is important to consider them in the perspective of the entire economy and in a comparative international perspective. Therefore we compare several structural and performance indicators of the Kyrgyz economy and agricultural sector with benchmarks in the CIS region. 1 Overall economic performance Gross Domestic Product. Over the period , Gross Domestic Product (GDP) largely increased in the country, following a similar trend as in the neighboring countries. However, in contrast to the European CIS and the Caucasian countries, GDP per capita growth was slower and started at a lower level: while in 2000, GDP per capita in the Kyrgyz Republic grew from USD279 in 2000 to USD853 in 2009 (22% per year), it increased its neighboring country, Kazakhstan, from USD1.231 in 2000 to USD6.922 in 2009 (51% per year) (Figure 1). In 2003 and 2004, there was strong economic growth and real GDP increased by approximately 7% per year, but in 2005, the first crisis hit the region when the president and its government were overthrown during the Tulip Revolution. This resulted in political instability, which had a negative impact on the growth in the overall economy including in the agricultural sector. However, already rapidly afterwards the economy recovered and in 2007 and 2008, real GDP growth was on average 8,5% (Table 1). 1 We will compare to other CIS countries in the region, including the European CIS (Russia, Belarus, Ukraine and Moldova), Transcaucasia (Azerbaijan, Armenia and Georgia) and the other Central Asian countries (Kazakhstan, Uzbekistan, Turkmenistan and Tajikistan). 21

21 Figure 1: Gross Domestic Product (GDP) per capita (current USD; ) Kyrgyzstan CIS countries GDP per capita (current USD) 1,200 1, GDP per capita (current USD) 12,000 10,000 8,000 6,000 4,000 2, Armenia Azerbaijan Belarus Georgia Kazakhstan Moldova Russia Tajikistan Turkmenistan Ukraine Uzbekistan Kyrgyzstan Source: EBRD Macroeconomic indicators Table 1: Real GDP growth (%, ) Kyrgyzstan Central Asia Kazakhstan Tajikistan Turkmenistan Uzbekistan Caucasus Armenia Azerbaijan Georgia Europe Belarus Moldova Russia Ukraine Source: EBRD Macroeconomic indicators 22

22 The Kyrgyz Republic - Opportunities and challenges to agricultural growth In 2008, crises periods hit the region again when the effects of increasing food prices and the world-wide financial crisis became clear. Economic crisis has constrained economic growth in the neighboring, resource-rich countries (such as Russia), where many of inhabitants of the poorer countries in the region (such as the Kyrgyz Republic) migrated to work (Swinnen and Van Herck, 2009). As a result of the economic crisis in 2009, remittances substantially declined and real GDP growth was only 2,3% (see Chapter 2, Poverty). In 2010, a third shock hit the region when anti-government political demonstrations took place against the president and its government. Protests were fuelled by the popular belief that corruption and misuse of public assets had increased since the political turmoil in Protests eventually led to the overthrow of the president and the government. In the south (Fergana Valley), the political and social tensions escalated into violent inter-ethnic clashes. In the civil conflict 300 persons were killed, injured and at the peak were internally displaced. In addition, large scale destruction of public and private property occurred and real GDP declined by 3,5% (World Bank, 2011b). Unemployment. Over the past years, the official unemployment rate remained constant and currently approximately 8% of the Kyrgyz population is unemployed, which is similar to other countries in the region (Figure 2). 2 However, it is important to note that one should be careful when interpreting these statistics as the official unemployment rate may be underestimated due to hidden unemployment (Russia and Kazakhstan) or over-employment in other sectors, for example in the agricultural sector. In the resource-rich CIS countries, unemployment has largely decreased in the 2000s due to strong economic growth, which attracted many migrant workers from the neighboring poorer countries (including the Kyrgyz Republic). However, in 2009, this decreasing trend was reversed as a result of the economic and financial crisis. 2 Note that we only include a selected number of countries, since there are no data for some countries (Turkmenistan) or data are unreliable (Tajikistan, Uzbekistan and Belarus). 23

23 Figure 2: Unemployment in selected CIS countries (%) 16 Kyrgyzstan 16 CIS countries Unemployment rate (%) Unemployment rate (%) Kyrgyzstan Armenia Kazakhstan Moldova Russia Ukraine Source: EBRD Macroeconomic Indicators Poverty Overall, poverty is high in Kyrgyzstan, where approximately 29% of the population has an income lower than USD2 per day. Also in several other CIS countries a large share of the population is still poor. For example, in Uzbekistan 77% of the population has an income lower than USD2 per day and also in Tajikistan (51%) and Georgia (32%) a large share of the population is living below the poverty line (Figure 3). Despite these high poverty rates, most countries in the region (including the Kyrgyz Republic) have experienced an impressive decline in poverty over the past decade. For example in Kyrgyzstan, aggregate poverty fell from 40% in 2006 to 32% in 2009 while extreme poverty declined from 9% to 3% over the same period (World Bank, 2011b) (Table 2). 24

24 The Kyrgyz Republic - Opportunities and challenges to agricultural growth Figure 3: Poverty in the selected CIS countries (% of the population with an income of less than USD2 per day) Uzbekistan 77% Tajikistan 51% Georgia Kyrgyzstan 29% 32% Moldova Armenia Azerbaijan 8% 13% 12% Albania 4% 0% 10% 20% 30% 40% 50% 60% 70% 80% Poverty 2USD/day (% of the population) 90% Source: World development indicators (note that we used data from the latest year before 2008 for which data were available to be able a cross-country comparison since do not have post-crisis data for all countries) However, there are large disparities within countries and especially in the rural areas in the country, as in most other countries in the region, there is a disproportionate share of poor households (Macours and Swinnen, 2008). In the Kyrgyz Republic, where approximately 64% of the population is living in rural areas, rural poverty (48% of the population in 2006) was substantially higher than urban poverty (27%). However, both numbers have decreased in the recent years and in 2008, respectively 37% (rural) and 23% (urban) of the population was poor. Table 2: Poverty trends in Kyrgyzstan (%, ) National Urban Rural Year Incidence (% of population) Change (%) Incidence (% of urban population) Change (%) Incidence (% of rural population) Change (%) All Poor Extremely Poor Source: Living Standards (Level) of the Population in the Kyrgyz Republic, , National Statistical Committee of the Kyrgyz Republic, Bishek, 2010 and 2011 obtained from World Bank (2011b). 25

25 An important driver behind the decline in poverty rates in recent years has been economic growth in the neighboring, resource-rich countries in the region, where many of them migrated to work (Swinnen and Van Herck, 2009). 3 Over the years, remittances increased substantially (Table 3). In the Kyrgyz Republic, remittances increased from 78 million USD (or 4% of GDP) in 2003 to 1232 million USD (or 24% of GDP) in When in 2008 and 2009, economic growth slowed down, real GDP decreased in most countries in the region, which resulted in an increase in unemployment rates, especially in the resource-rich countries (Figure 2). The increase in unemployment in the richer countries did not only have implications for the domestic population, but also for the many migrants from the poorer countries in the region, including Kyrgyzstan. As a result of the economic crisis in 2009, remittances substantially declined in all countries, but seem to be on the rise again in 2010 (Table 3). Table 3: Workers remittances (USD million) e The Kyrgyz Republic Central Asia Kazakhstan Tajikistan Turkmenistan n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Uzbekistan n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Caucasus Armenia Azerbaijan Georgia Europe Belarus Moldova Russia Ukraine Source: World Bank 26 3 For workers from most countries in Transcaucasia and Central Asia, such as Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan, the major destinations to find employment are Russia and Kazakhstan, whereas workers from Moldova mainly leave for the European Union.

26 The Kyrgyz Republic - Opportunities and challenges to agricultural growth Reinforced by the consequences of the civil conflict in the southern part of the country, the decline in economic growth is reflected in the poverty statistics: while both rural and urban poverty have been declining in the period , there was a turning point in 2010 and poverty increased to respectively 34% (all poor) and 5% (extremely poor). In the rural areas, the increase of the incidence of poverty was found to be larger than in the urban areas (Table 2). Importance of the agricultural & food industry in the economy Share of agriculture in total GDP. Over the past decade, the share of the agricultural sector in total GDP has decreased substantially in Kyrgyzstan and since 2000 the share of agriculture in total GDP declined from 34% to 22% in 2009 (Figure 4). Also in the other CIS countries the share of agriculture in total GDP largely declined in the past decade. For example, in Moldova, it was still 25% in 2000, while in 2008 it has declined to less than 9%. Nevertheless, there is still a huge gap between the share of agriculture in GDP in Kyrgyzstan and the share of agriculture in GDP in Russia (five times higher in Kyrgyzstan) or Kazakhstan (three times higher in Kyrgyzstan). In fact, the share of agriculture in GDP in the country is the highest in the region. Figure 4: Share agriculture in total GDP (%) Share agriculture in total GDP (%) Kyrgyzstan Share agriculture in total GDP (%) CIS countries Kyrgyzstan Armenia Azerbaijan Belarus Georgia Kazakhstan Moldova Russia Taijikistan Turkmenistan Ukraine Uzbekistan Source: EBRD Macroeconomic Indicators 27

27 Share of agriculture in total employment. In the beginning of the 2000s, the share of agriculture in total employment was huge and approximately one out two individuals were employed in agriculture (Figure 5). However, over the past decade, the share of agriculture in total employment declined rapidly and currently 35% of the population is working in agriculture. If this trend continues the agricultural population will be halved by Figure 5: Share of agricultural employment in total employment (%) 70 Kyrgyzstan 70 CIS countries Kyrgyzstan Armenia Share agriculture in total employment Share agriculture in total employment Azerbaijan Georgia Kazachstan Moldova Russia Tajikistan Turkmenistan Ukraine Uzbekistan Source: ILO Importance of the agro-processing industry. The agro-processing industry in the country, accounts for approximately 7,5% of the total GDP. The most important food processing industry by turnover is the dairy industry, with a stable growth in Flour and sugar producers are the second and third most important food processing industries by turnover. Meat and vegetables processing companies have the lowest turnover (Figure 6). 28

28 The Kyrgyz Republic - Opportunities and challenges to agricultural growth Figure 6: Leading food processing sub sectors by turnover (million KGS) Milk processing and cheese production Production of flour and goats Sugar production Production of Mineral water and soft drinks Production of distilled liquors Ice-cream production Production of crackers and dry bread Production of ethyl alcohol Production of beer Tea and coffee packing Production of meat products Source: Serova et al. (2009) In general, processing companies use old machinery, poor or unattractive packaging and labeling and the management lacks marketing skills. Competition is mainly on price rather than on quality and the sector is generating insufficient profits to finance new investments. Furthermore, the collapse of the Former Soviet Union led to the breakdown of the system of vertical integration and coordination between processors and farmers in production chains, lowering contract enforceability (see Chapter 3, Integration in modern supply chains) (Marx and Hollinger, 2006). In order to support the Kyrgyz agro-processing industry and enhance the development of modern supply chains, World Bank implemented in 2005 the Agribusiness and Marketing Project in Kyrgyzstan. The objective of this project is to enforce supply chain linkages with the aim of increasing value added at the farm gate. In order to do so the project consists of two components: first, there is a Market Development Component, which aims to strengthen linkages between processors, traders and agricultural producers through the development of the Agribusiness Competitiveness Center that monitors markets (for the major commodities) and identifies trade and administrative barriers. Second, there is an Access to Credit Component. This includes a credit line to participating financial institutions for the financing of 81 agribusiness companies (for a total of USD 5,5 million) and the provision of technical assistance and training to loan officials of commercial banks (e.g. on the development of innovative contract mechanisms in the supply chain). 29

29 Agricultural output In the first years of transition Gross Agricultural Output (GAO) strongly decreased in Kyrgyzstan, as it has been the case in all CIS countries (Figure 7). However, in the country, the decline in agricultural output was limited, whereas in the middle income countries, such as Ukraine, Russia and Kazakhstan, agricultural output declined by more than 40%. Figure 7: Evolution of gross agricultural output (% change) Kyrgyzstan Change in Gross Agricultural Output (1990=0) Change in Gross Agricultural Output (1990=0) CIS countries Kyrgyzstan Armenia Azerbaijan Belarus Georgia Kazakhstan Moldova Russia Tajikistan Turkmenistan Ukraine Uzbekistan Source: National Statistics and FAOstat 2011 Despite differences in the magnitude of the decline of GAO between the CIS countries, there were also differences in the time until recovery and speed of it. In the Kyrgyz Republic, GAO started to increase again in 1995 and by the beginning of the 2000s GAO exceeded the pre-reform level. By 2009, GAO was 18% above its pre-reform level. In fact, we can distinguish three distinct growth patterns over the period : Strong decrease of GAO between 1991 and 1995: In the first years after the collapse of the FSU, GAO declined on average by 2% per year as the consequence of liberalization and the breakdown of existing supply chains for outputs and inputs. Strong increase of GAO between 1995 and 2000: In this period, privatization and individualization of the agricultural sector have been important drivers behind the rapid growth in GAO (on average 6% per year). Stagnation of GAO from 2000 onwards: From 2000 onwards, GAO growth stagnated at approximately 0,9% per year. 30